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Published: June 4, 2002

 
 

Digital Cinema: Promising Future, Dicey Debut

Practical Hurdles
Still, all of the potential economic advantages of digital cinema — close to $1 billion in additional annual revenue for theaters, and $1 billion in cost savings for studios — pale in comparison to the estimated $5 billion to $7 billion to upgrade the infrastructure, and can’t justify a complete switchover in a short period of time. For this industry, spending money without a quick payback is not part of the culture.

Moreover, for the studios, there are other obstacles to digital. For one thing, it’s not clear yet which of the competing technological specifications will become the standard for digital cinema, and until that is determined, studios will be reluctant to risk backing the wrong approach. In addition, the thought of operating two different distribution systems for a period of time is not particularly palatable. And, most serious of all, the studios are fearful that distributing their films over computer networks will lead to piracy.

Meanwhile, the revenue-sharing arrangement between theater owners and studios — an outdated business model that the studios don’t want to change — makes digital cinema much less desirable for the theaters. Currently, the largest percentage of revenues goes to the studios at the start of a movie’s run, declining about 10 percent each week after the opening. This means that if demand for a new film beats expectations, and theaters can use digital files to immediately show the film on more screens, studios will actually get a larger share of the increased revenues from new releases.

“Distributors could invest in digital cinema equipment in return for a share of incremental revenues for advertising and alternative content. They could also offer the studios reduced fees as an incentive for providing digital movies.”
Moreover, the promise of additional revenue from advertising or other uses of the facilities, while attractive, is too speculative at a time when theater owners are scraping for cash. Starting in the mid-'90s, theater chains spent billions to build megaplexes, luring moviegoers with stadium seating, larger screens, and expanded concession areas. But the interest payments for the construction boom combined with lease commitments on older, unused theaters drained profits. By 2001, a dozen major chains filed for bankruptcy. With this economic backdrop, there isn’t a lot of cash available for capital investments involving long-term returns.

What Distributors Could Do
So with the studios and theater chains resistant to digital production and distribution, the only hope for digital cinema may lie with the film distributors. These companies collect upward of $1 billion in fees a year to reproduce and disseminate celluloid prints to theaters. Traditional distributors, like Technicolor, as well as companies better known for electronic communications, such as Qualcomm and Boeing, view digital cinema as a potentially lucrative innovation that could cut the cost of distribution and open a new communications market. To test the waters, they’re slowly beginning to infuse the first round of much needed capital into the system. Technicolor recently announced a plan to fund 1,000 digital screens. And Boeing says it will soon have 40 systems in place worldwide that will use satellite technology to distribute films.

Distributors could invest in the installation of digital cinema equipment in return for a share of incremental revenues for advertising and alternative content. They could also offer the studios reduced fees as an incentive for providing digital movies. In addition, distributors could syndicate advertising and alternative content, given their relationships with the full universe of theaters.

Digital cinema is an exciting technology that promises to transform the neighborhood theater into a more versatile and profitable entertainment space. But the capital investment requirements and the conflicting interests of industry stakeholders have slowed progress. For now, the distributors have emerged as the most likely candidates to break the logjam.

 
 
 
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Resources

  1. “OnLine Music Gets a Hollywood Strategy,” by G. Krishan Bhatia, Richard C. Gay, and W. Ross Honey, s+b enews, 07/03/01. Click here.
  2. “How to ‘Truck’ the Brand: Lessons from the Grateful Dead,” by Glenn Rifkin, s+b, 1Q 1997. Click here.